8 facts about sustainable finance – and how it affects you

Companies
looking for land to grow crops like palm oil, for industries like oil, gas or
mining, or for housing and infrastructure, rely on finance and loans from the
financial institutions we in the European Union (EU) invest in. However, with
few rules in place to regulate those investors, there is little to stop them financing
projects that are socially or environmentally damaging. Below are 8 facts you
didn’t know about sustainable finance in the EU – and how crucial it is.

1. This isn’t something that just impacts on a
faceless financial company – investments as granular as your own pension could
be implicated in unethical or harmful investments without you realising.

Our case studies[1]
have demonstrated the involvement of EU investments in projects causing land
grabs, human rights abuses and deforestation. This applies to hedge funds,
banks, institutional investors – down to individual people’s investments, like their
pensions. It’s critical that consumers and businesses alike know what their
investments are driving. That’s why sustainable finance is so important.

2. Investors committing these kind of land grabs
are not necessarily shady hidden funds – they can be global financial players.

Our ‘Rubber
Barons’ report revealed the devastating impact of Vietnam’s rush for rubber
on local communities in Laos and Cambodia. The investigation shows how
international financiers Deutsche Bank and the International Finance
Corporation were backing these land grabs – often in contravention of their own
policies. Our report ‘The
New Snake Oil?’ showed how state officials in Liberia were said to be
helping the palm oil company Golden Veroleum harass communities into signing
away their land and crush dissent - with Standard Chartered, HSBC, and Citibank
alone holding shares in Golden Veroleum’s parent company - Golden
Agri-Resources - worth nearly US$ 1.5 billion.

3. The European Union’s role is crucial…

EU-based banks and
investment institutions are major funders of large-scale commercial agriculture
projects in tropical regions. These projects often lead to deforestation and
human rights abuses for displaced communities. The EU’s investment industry is worth
over €22.8 trillion and still growing.[2]
That is a ratio of 138% to the European GDP.[3]
This industry invests in companies throughout Europe and the beyond into the
developing world. The EU is therefore a huge global player and has a
responsibility to ensure finance and investment from Europe is supporting
sustainability goals and not harming people and the planet.

4. ...but it’s falling behind global trends on
sustainable finance

Social and environmental regulations
for financial institutions are gaining traction around the world, potentially
leaving the EU behind. Brazil, China, Bangladesh, Nigeria, Indonesia and Peru
have all moved to introduce social and environmental risk management and
reporting requirements on banks and in some cases other financial institutions[4].

5. Companies and investors are actually at a
higher risk without robust sustainable financial regulations

It’s
a believed and common myth that increased regulations will reduce European
competitiveness and make the EU financial sector less profitable. The reality
on the ground tells a very different story. Financial risks for companies posed
from not addressing environmental, social and governance risks such as land
grabbing are multiple. A study of extractive, logging and agribusiness
concessions in eight tropical countries found that 93% of them involved land
already inhabited by local communities.[5] The
average global operating costs of a three-year USD$10 million investment could
be 29 times higher than normal if the project was forced to stop because of
local community opposition[6].
Another example from our work - the
launch of Global Witness’ report ‘Rubber Barons’ reportedly coincided with a 6%
drop in HAGL’s share price, representing a US$20 million personal loss for the
company’s Chairman. [7]

6. Voluntary measures don’t work

Apart from two legislative proposals,
the majority of the Actions within the Commission’s new Sustainable Finance
Action Plan rely on voluntary measures and are non-binding. A number of studies
by the UN have highlighted how the UN Global Compact and Principles of Responsible
Investment aren’t being implemented, and that agreeing to a principle of policy
is not sufficient. Put simply, if the plethora of voluntary initiatives
designed to help companies behave responsibly, protect the environment and
respect human rights were fit-for-purpose, we would not have seen the land grab
phenomenon reaching such a global crisis[8].

7. Currently, there are no measures in place to
ensure investors conduct due diligence on all environmental, social and
governance (ESG) risks in their investment chains or decision-making

Mandatory
due diligence is essential to ensure investors are mitigating against risks to
people and the environment and not driving corruption and other governance
black holes. It would immediately
help families across Africa and Asia who are being forced off their land due to
projects
backed by money from European investors. Additionally,
of critical importance in terms of the identification, prevention,
mitigation and accounting of adverse sustainability impacts, is that due
diligence and other risk monitoring and management strategies are considered an
ongoing process. A global study in 2016 of 362 cases of natural resource-based
investments which had encountered land tenure disputes with local communities,
identified that 58% of disputes started during the identification, preparation
and establishment phases of the projects, with a further 31% of disputes
starting during the operational phase[9].
During the identification phase only 12% of disputes had started, highlighting
the limitations of due diligence if done only when projects are in the
feasibility stages.

8. The EU is able to regulate how investors registered
within its jurisdiction operate, even when overseas, in three key ways:

1. Introduce
mandatory due diligence and establish systems to improve access to
justice for victims of corporate abuses. The French Duty of Vigilance Law[10]
shows how this can be done, covering companies collecting financing in Europe
or selling financial products in Europe, even for operations outside of Europe.
Other examples include the UK and the USA, both of which require companies
overseas to follow national anti-corruption legislation.

2. Broaden
the scope of the proposed EU sustainable finance taxonomy to
genuine sustainability and not narrow climate change-related risks; only
investments and products that respect all dimensions of E, S and G should be
considered sustainable.

3. Use the
forthcoming financial reporting review to establish reporting requirements for companies
as part of their corporate registration and annual reports, and ensure that
these reports are freely available to the public, in a structured and
harmonised European format.

[4] SOMO (2015) Mobilising the financial sector for a
sustainable future: mapping existing approaches to promote social and
environmental sustainability goals in the financial sector, available for
download at: www.somo.nl/publications-en/Publication_4255/at_download/fullfile

[8] UN Global Compact Office (2011), United National
Global Compact Office Annual Review, available for download at:
https://www.unglobalcompact.org/docs/news_events/8.1/UN_Global_Compact_Annual_Review_2010.pdf;
UN Environment Programme (2009) Fiduciary responsibility: legal and practical aspects of
integrating environmental issues into institutional investments, available for
download at: www.unepfi.org/fileadmin/documents/fiduciaryII.pdf; UN Principles
for Responsible Investment (2011) 5 Years of Progress, Report of Progress 2011:
an analysis of signatory progress and guidance on implementation, available for
download:
http://www.unpri.org/viewer/?file=wp-content/uploads/2011_report_on_progress1.pdf;
the findings of these reports are also summarised in the 2015 report by SOMO,
Mobilising the financial sector for a sustainable future: mapping existing
approaches to promote social and environmental sustainability goals in the
financial sector, available for download at:
www.somo.nl/publications-en/Publication_4255/at_download/fullfile